2012.04.18 - IMF_April_2012_text
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2012.04.18 - IMF_April_2012_text

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estimates.

Note: ABS = asset-backed security; CDO = collateralized debt obligation; CDO2 = CDO-squared and CDOs backed by ABS and MBS; MBS =
mortgage-backed security; RMBS = residential MBS; CMBS = commercial MBS.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O RT

30 International Monetary Fund | April 2012

Central Bank Supply

In response to the global financial crisis, major cen-
tral banks undertook the role of providing safer assets.
In normal times, central banks enlarge or reduce the
supply of central bank money in the system through
exchanges of high-quality securities with longer maturi-
ties and less liquidity; thus they in effect conduct matu-
rity and liquidity transformation within the safe asset

universe (see Box 3.6).55 In contrast, during the crisis,
central banks could and actually did act as a backstop
by temporarily exchanging riskier assets with safer ones
(central bank money), in part via an expansion of eli-
gible collateral types, with more frequent open market
operations to a broader range of counterparties and at

55Liquidity here refers to closeness to cash.

On the supply side, central banks can augment
banking system reserve balances, primarily via open
market operations. From the perspective of a bank,
such reserve balances can be viewed as safe assets
because they: (1) are most liquid (can be used for
immediate settlements), (2) carry no market risk
(nominal values remain constant), and (3) do not
embed credit risk (at least in nominal terms, given
central banks’ ability to issue fiat money).1 Cen-
tral banks also supply banknotes—a medium of
exchange without market and credit risks in the
present context—to the general public.2

On the demand side, central banks conduct
collateralized lending—including securities repo
transactions—and outright securities purchases to
provide the most liquid assets to the financial system
(Table 3.6.1). Central banks generally do not engage
in unsecured lending so as to protect themselves
(and ultimately, to protect taxpayers should central
banks need to be recapitalized) against financial losses
related to counterparty defaults. In this context,
eligible collateral for open market operations and
standing facilities also tends to be restricted to high-
quality securities. However, the types and range of
such collateral vary considerably across central banks,

in view of country- specific factors such as banking
and financial market structures, number and diversity
of counterparties, and statutory requirements.3

Similarly, eligible securities for outright purchases
are generally limited to domestic government securities
and, to a lesser extent, securities issued by central banks
(Table 3.6.2). Because many countries have deep mar-
kets for government securities, such purchases are often
used by central banks as a tool for injecting liquidity
into the financial system while minimizing interference
in domestic capital allocation and credit risk.

Box 3.6. Conventional Monetary Policy and Its Demand for Safe Assets under Normal Conditions

Note: Prepared by Ken Chikada.
1 This in turn implies that central bank money is suscep-

tible to inflation risk and thus is not entirely risk free.
2 Central banks could also issue central bank bills or offer

term deposits to financial institutions. Such instruments could
be considered safe assets in a broader context, as they have
zero credit risk and generally low market risk, given their
short-term maturities. Also, they are typically used to absorb
excess liquidity in the system and thus are tools for matu-
rity and liquidity transformation within the central banks’
liabilities.

3See Chailloux, Gray, and McCaughrin (2008); and Cheun,
von Köppen-Mertes, and Weller (2009) for more details on
the collateral frameworks.

Table 3.6.2. Proportion of Central Banks Purchasing
Selected Securities for Open Market Operations,
2010
(In percent)

Government securities 70.7
Central bank liabilities 43.1
Other 15.5

Source: IMF Information Systems for Instruments of Monetary Policy
(2010).

Note: Results are for 58 central banks that conduct outright purchases of
securities for open market operations. Many central banks purchase more than
one of the types shown.

Table 3.6.1. Proportion of Central Banks Using
Selected Tools for Open Market Operations, 2010
(In percent)

Outright purchase of securities 56.3
Securities repo 79.6
Collateralized lending 65.0

Source: IMF Information Systems for Instruments of Monetary Policy
(2010).

Note: Results are for 103 central banks. Many central banks use more than
one of the tools shown.

C H A P T E R 3 S A f e A S S e tS: f i n A n c i A l S yS t e m co r n e r S to n e?

 International Monetary Fund | April 2012 31

longer maturities. They also made direct or indirect
purchases of securities that had lost liquidity—a key
characteristic of safety—in specific market segments,
including commercial paper, corporate bonds, and
asset-backed securities (Figure 3.15).56 While valuable

56This process is still under way in the euro area. For a more
general discussion and assessment of unconventional monetary

as a crisis management tool, this process clearly has
limits, as central banks assume the credit risk of the
securities taken onto their balance sheets.

policies, see Borio and Disyatat (2009); and IMF (2009b), for
example. In contrast to a central bank’s traditional role as the
lender of last resort, Tucker (2009) refers to this new role as the
market maker of last resort.

Main re�nancing operations

Long-term re�nancing
operations

Securities Markets Program
Covered bonds purchase

Bank notes
Reserve balances

Term absorption

European Central Bank

Assets

Liabilities

–500

–400

–300

–200

–100

0

100

200

300

400

500

Short-term market operations Long-term market operations
Gilt purchase Bank notes
Reserve balances Term absorption

Bank of England

Assets

Liabilities

–250

–200

–150

–100

–50

0

50

100

150

200

250

–250

–200

–150

–100

–50

0

50

100

150

200

250

–250

–200

–150

–100

–50

0

50

100

150

200

250

2007 08 09 10 11 12

2007 08 09 10 11 12

2007 08 09 10 11 12

2007 08 09 10 11 12

Repurchase agreements New liquidity facilities
Credit market measures Treasury securities purchase
Other securities purchase Reserve balances
Bank notes Term absorption

Federal Reserve

Assets

Liabilities

Traditional market operations
New lending facilities

Japanese government 
securities purchase

Other securities purchase
Bank notes

Reserve balances
Term absorption

Bank of Japan

Assets

Liabilities

Figure 3.15. Selected Advanced Economies: Changes in Central Bank Assets and Liabilities since the Global Crisis
(In percent relative to monetary base at end-2006)

Sources: Bloomberg L.P.; central banks; Haver Analytics; and IMF staff estimates.
Note: Monetary base here is defined as bank notes in circulation plus reserve balances (including excess reserves and overnight deposit facilities). Term absorptions consist of

term deposits, reverse repo transactions, central bank bills (for the Bank of Japan), and U.S. Treasury Supplementary Financing Account (for the Federal Reserve). New liquidity
facilities and new lending facilities include measures that were already terminated. New liquidity facilities of the Federal Reserve include U.S. dollar liquidity swap arrangements with
central banks. Credit market measures of the Federal Reserve consist of facilities such as the Commercial Paper Funding Facility, Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility, and Term Asset-Backed Securities Loan Facility.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O RT

32 International Monetary Fund | April 2012

As a result of these crisis-driven operations, the
increase in central bank reserve balances was quite
pronounced, particularly for the Federal Reserve, the
Bank of England, and the European Central Bank.

Spikes in central